Thursday, April 30, 2015

Only those know to swim parallel to the shore can escape the destructive rip-tide of debt and speculative risk pulling everyone to insecurity and impoverishment.

Longtime correspondent Kevin K. recently shared an extremely insightful analogy of our financial peril. Those of you who swim or body-surf in the ocean are familiar with rip-tides--strong currents shaped by the contours of inlets and bays that pull unwary swimmers rapidly out to sea.

Those with experience of rip-tides know that it is futile to swim against the tide--those who try will only exhaust themselves, and be carried away despite their exertions.

The only way to escape the rip-tide is to swim parallel to the shore. This succeeds because the rip-tide is like a narrow river; once the swimmer moves out of the strong flow, the current's deadly pull quickly subsides.

Kevin described the economic and cultural rip-tide of the postwar years 1945 - 1985 as positive: anyone caught in this great tide of prosperity would be carried into secure jobs, homeownership, opportunities for attending college--all the critical elements of middle-class prosperity that were widely available to the majority of households.

This tide of prosperity was powered by the GI Bill that paid higher education costs for 20+ million veterans of World War II and Korea and later, of the Vietnam war, abundant factory and office jobs that offered relatively high pay to those with little education, and dirt-cheap (by today's standards) college. (CUNY, the public university in New York, was free until the late 1970s.)

Once the civil rights movement eliminated the most egregious sources of blatant discrimination (for example, banning Asians and African-Americans from owning property in certain parts of town) in the mid-1960s, the legal impediments to widespread social mobility (i.e. rising up to join the middle class) were swept aside. (To be sure, significant impediments remain, but these are social and economic rather than legal.)

My father once said that when he was a young veteran in the late 1940s and early 1950s, virtually any vet with a job could buy a house with a low-down-payment VA mortgage, as homes were cheap: three times a modest income was typical. To his way of thinking, those vets who stayed renters did so as a choice, not as a necessity. (He bought a relatively spacious house and supported four children and a spouse on the salary of a Sears appliance salesman.)

Kevin related that growing up in San Francisco, the working-class Irish and Italian households bought houses despite modest salaries--not McMansions, to be sure, but homes that built equity that could be passed on to their offspring.

Today's financial tide is carrying everyone to impoverishment via rising debt loads,over-priced college degrees, unaffordable homes and a loss of the cultural/practical skills that enabled those of lesser means to acquire capital rather than debt.

Only those know to swim parallel to the shore can escape the destructive rip-tide of debt and speculative risk pulling the unwary to insecurity and impoverishment.

Everyone swept up in the speculative tide of monumental student debt and dependence on state entitlements and/or Wall Street's speculative machine is not being carried to prosperity but to modern-day serfdom.

The only way to survive and prosper is to swim out of this tide of debt and speculation rather than fight it head-on. Don't take on excessive debt, avoid speculating in any financial game controlled by the Federal Reserve and Wall Street, buy income-producing tools and assets that you control, and creatively cut expenses to the bone so your household can live well on one income.

This essay was drawn from Musings Report 12. The weekly Reports are emailed exclusively to subscribers ($5/month) and major contributors $50+/year).

Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)Are you like me?Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible. And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.
You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.
Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.
So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.
It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.
I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.
Test drive the first section and see for yourself. Kindle, $9.95print, $20
"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."Laura Y.
Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube)The Old Models of Work Are Broken

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Stephen J. ($50), for yet another stupendously generous contribution to this site-- I am greatly honored by your steadfast support and readership.

Though the mainstream financial media reports on central bank policy as if the policies move the markets, the actual mechanism is not policies per se but their effect on the belief structure of market participants.

If market participants believe the markets are going higher, for whatever reason, they will buy more stocks to reap the anticipated gains.

If market participants believe the top is in and markets will decline, they will sell, i.e. liquidate positions rather than build them. This is called distribution, as the smart money distributes stocks to the greater fools who have yet to get the memo that the top is in and from now on, stocks will only lose value.

What causes the herd to turn? The process is not entirely mechanical or predictable. Those in the front of the herd tend to lead those following, and so we look to the leading stocks, sectors and players for clues as to what the herd will do.

When the leaders of the stock rally dwindle to a few names, that is evidence that the herd is losing its momentum and confidence.

When those leaders no longer make new highs but instead notch lower highs despite good news, that is further evidence that the herd's direction is becoming increasingly uncertain.

When the herd's leading edge veers first one way and then the other, this lack of coherence is also evidence that the herd's leaders are no longer confident in which direction to take.

The herd is all about following the pack in front. The animals just behind the leaders have no way to know what the animals in the rear of the herd are doing; they only know what the leaders are doing, and the herd instinct is to not leave the safety of numbers.

So when the leaders turn, the herd follows. The leaders might sense danger ahead, or see obstacles to avoid. Which way to go? A handful of those in the front decide for all those behind, and that decision is ultimately based on avoiding risk.

Once the herd has turned, all attempts to reverse the change in direction fail as the momentum cannot be stopped.

When the leaders realize that further market gains are increasingly unlikely and fraught with risk, they will exit. The herd following them will also exit, as the selling of the leaders will eventually push markets down despite central bank purchases.

To the leaders who are selling, central banks are simply large-scale chumps, snapping up shares right when those buying stocks are about to stampede over the cliff. Central banks buying equities give sellers more opportunities to distribute to greater fools; they can't change the direction of the herd.

The ultimate hubris of central banks was their supreme belief in their own powers to direct the herd. As long as the herd was stampeding in one direction, the central banks could imagine that their shouted orders were directing the herd.

But once the herd turns, the futility of those orders will be revealed.

Once market participants realize the top is in and the only possible result from here on is a loss, the herd will turn and follow the leaders who are selling.

Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)Are you like me?Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.

And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."Laura Y.
Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube)The Old Models of Work Are Broken

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Mike G. ($100), for your outrageously generous contribution to this site-- I am greatly honored by your steadfast support and readership.

Tuesday, April 28, 2015

The entire economic and political structure is now dependent in one way or another on the continued expansion of financial markets.

The financial markets don't just dominate the economy--they now control everything. In 1999, the BBC broadcast a 4-part documentary by Adam Curtis, The Mayfair Set ( Episode 1: "Who Pays Wins" 58 minutes), that explored the way financial markets have come to dominate not just the economy but the political process and society.

In effect, politicians now look to the markets for policy guidance, and any market turbulence now causes governments to quickly amend their policies to "rescue" the all-important markets from instability.

This is a global trend that has gathered momentum since the program was broadcast in 1999, as The Global Financial Meltdown of 2008-09 greatly reinforced the dominance of markets.

It's not just banks that have become too big to fail; the markets themselves are now too influential and big to fail.

Curtis focuses considerable attention on the way in which seemingly "good" financial entities such as pension funds actively enabled the "bad" corporate raiders of the 1980s by purchasing the high-yield junk bonds the raiders used to finance their asset-stripping ventures.

This increasing dependence of "good" entities on players making risky bets and manipulating markets has created perverse incentives to keep the financial bubble-blowing going with government backstops and changing the rules to mask systemic leverage and risk.

The government must prop up markets, not just to insure the cash keeps flowing into political campaign coffers, but to save pension funds and the "wealth effect" that is now the sole driver of "growth" (expanding consumption) other than debt.

To maintain the illusion of growth and rising wealth, the financial markets must continually reach greater extremes: extremes of debt, leverage, obscurity and valuations. These extremes destabilize markets, first beneath the surface and then all too visibly.

The technological advances of the past decade have enabled a host of financial schemes that together have the potential to destabilize the markets globally.Technology enables high-frequency (HFT) traders to only suffer one losing day per year, complex reverse-repo swaps/trades, huge derivative bets and shadow banking, where all the risks generated by these activities can pool up outside the view and control of regulators.

The entire economic and political structure is now dependent in one way or another on the continued expansion of financial markets.

This spells the end of the electoral-political control of the economy, as politicians of all stripes quickly abandon all their ideologies and policies and rush to "save" the markets from any turmoil, because that turmoil could destabilize not just the financial markets but the economy, pensions and ultimately the government's ability to finance its own profligate borrowing and spending.

This dependence on the markets is pushing central banks and states into ever-more extreme policies, even as the risks of complex swaps and trades is rising beneath the surface.

A case can be made that the technologically-enabled complexity of the shadow-banking markets is now beyond the control of the state or central bank, which leads to a sobering conclusion: the next crisis will not be controllable, and destabilized markets will not be "saved" by tricks such as lowering interest rates to zero and increasing liquidity.

The structural problem with everyone and everything now depending on the speculative returns of the financial markets is there can never be any market clearing event that exposes phantom collateral and forces the liquidation of bad debt and excess credit.

When a forest is never allowed to burn away the accumulation of dead branches and underbrush with a limited fire, the forest eventually catches fire anyway. The deadwood (of bad debt, excessive credit and leverage and phantom collateral) is now piled so high, the entire forest burns down to ashes.

This is the eventual cost of never allowing any clearing of financial deadwood because everyone is now so dependent on financial markets that the slightest swoon will bring down the entire system. This vulnerability only increases with every "save" and every new bubble.

All the "saves" have done is guarantee the financial system will burn down in a conflagration ignited by a seemingly trivial spark somewhere in the vast global system of phantom collateral.

Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)Are you like me?Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible. And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.
You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.
Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.
So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.
It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.
I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.
Test drive the first section and see for yourself. Kindle, $9.95print, $20
"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."Laura Y.Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube)

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Larry H. ($50), for your splendidly generous contribution to this site-- I am greatly honored by your steadfast support and readership.

These articles implicitly raise a question: how much of our work is compliance with regulations, enforcement of those regulations and menial servitude to the New Aristocracy, i.e. the top 10% who have prospered as financiers and the technocrats who manage the central-state/vested-interests status quo?

Another reason is that most of the income gains of the past few decades have flowed to the very top of the income pyramid:

Since the top apex has sucked most of the financial oxygen out of the system, much of the system has adapted by serving the needs of those few who have benefited from financialization.

More education is not the answer--though assistant provosts to the adjunct deans currently skimming huge salaries are anxious to keep their share of the higher-education gravy train.

Despite the ceaseless propaganda about the value of college--translated into English, this means, "please keep borrowing $100,000 for a worthless degree so I can keep my $250,000 per year job as assistant provost to the adjunct dean of academic standards and political correctness in the Educrat Industry"--the reality is the wages of college grads are not keeping pace with the soaring cost of supporting all those assistant provosts to the adjunct deans and shiny new admin buildings on campuses.

Those on the bottom of the higher-education food chain aren't doing as well as the well-paid educrats; many of those who are actually doing the lowly, poorly paid work of teaching students qualify for social welfare programs:

Another factor is the rising dominance of industries that are mostly low-value paper-shuffling: healthcare (up to 50% of the costs in the U.S. system is estimated to be shuffling paper or fraud enabled by the blizzard of insurance claims), higher education, which is increasingly a factory for loans and high-overhead issuance of credits and credentials, and of course the debt industry itself: the financial sector and its various pools of predators and parasites.

This leads to a question that must be asked of every post-industrial economy burdened with a regulatory utopia mandated by the state/vested-interests neofeudal arrangement: are we really producing anything? Is the UK really producing anything?

It's difficult to estimate the quantity of our work devoted to data-shuffling compliance with and enforcement of perverse regulations and neofeudal menial-servitude to the top 10%, but shall we start with 40% and go from there?

Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)Are you like me?Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.

And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."Laura Y.Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube)

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, John N. ($50), for your marvelously generous contribution to this site-- I am greatly honored by your steadfast support and readership.

3. Conventional financial authorities insist this is not a blow-off top.

4. The expressions of regret of those who sat out the latest rally become ubiquitous.

In the past few days, I have read two laughably baseless justifications of the bubble in Chinese stocks by conventional financial analysts:

A) China is a "black box," i.e. unfathomable, so go with what we know, which is that China is a nation of entrepreneurs: this is the green light to buy the bubble here if you want to reap easy profits.

B) The stock market bubble in China is positive evidence of a healthy re-adjustment of China's financial system.

That neither thesis has the slightest foundation in reality doesn't matter, as the real agenda of the analysts is to justify their own attempts to join the crowd reaping vast profits in the bubble.

This denial that a speculative blow-off is clearly occurring is a key indicator that a blow-off top is in its final stages.

Consider the Shanghai stock index (SSEC). Is it truly normal for the stock markets of nations with economies approaching stall-speed to double in less than a year?

Amazon is a large, well-run corporation, but its core businesses are low-margin (as for the cloud business--everybody and their brother is ramping up their cloud biz). Is it truly normal for a low-margin company's stock to rise 50+% in four months?

Margin debt reflects the "animal spirits" of speculation and confidence. When borrowed money is used to buy more stocks, it makes the resulting rise vulnerable to a decline that forces recent buyers to liquidate their positions to cover their margin calls.

Margin debt has reached new highs; what happened when margin debt hit these levels in prior cycles?

The soaring confidence in future advances that define blow-off tops is visible in declining measures of volatility such as the VIX and VXX. (Recall that volatility and stocks are on a see-saw; should the VXX reverse and move higher, stocks would plummet.)

One last method to identify blow-off tops is to look for repeating patterns that marked previous blow-off tops.

Those who lived through the last two speculative blow-off tops know the impossibility of predicting the final top. Those who bet the top is in (i.e. make short bets that will gain if the market reverses and drops) are often forced to cover when the market advances further, and this panic buying pushes the market even higher.

Only when the ranks of bears willing to bet against the market thin will the short-covering boost dissipate. At that point of bearish exhaustion, the market will roll over when the greater fools (last buyers of the blow-off top) run out of margin buying power.

Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)Are you like me?Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.

And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."Laura Y.Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube)

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Steve M. ($50), for your massively generous contribution to this site-- I am greatly honored by your steadfast support and readership.

Saturday, April 25, 2015

All those angered by the mere question of the viability of this predatory pillaging in the name of capitalism are incapable of even admitting this cultural crisis exists.

Somewhere along the line, we lost the ability to distinguish between earning a profit and maximizing private gain by any means, i.e. Infinite Greed. If you insist on making this distinction now, you anger a lot of people, as it blows the capitalist cover of Infinite Greed.

The distinction between earning a profit and maximizing private gain by any means angers not just the few benefiting from the useful delusion that Infinite Greed is simply profit on overdrive; it seems to anger everyone who believes the Status Quo of burning mountains of coal to power towel warmers, sitting in traffic burning petrol two hours a day and central banks enriching the already wealthy is not just sustainable but gol-darned good.

If you make the distinction between earning a profit and maximizing private gain by any means, then you realize the status quo is neither sustainable nor good: it is unsustainable and evil. This angers everyone who has rationalized their investment in (and defense of) an evil system, because, well, it's hard to feel all warm and fuzzy about your choices if the phony facade falls and the evil of the system you've defended is starkly revealed.

Every enterprise must earn a profit to survive. A worker-owned collective must earn a profit, as it needs money to reinvest in the business and reward those who have invested their capital (human, social, financial, intellectual, etc.) in the enterprise.

If the collective can't reinvest in new plant and new workers as the old equipment fails and old workers retire, it will weaken and collapse. This is equally true of any business owned by the state (i.e. a socialist enterprise): if the state-owned enterprise doesn't earn a profit that can be reinvested in the business, it can only survive if it is subsidized by some other enterprise that is earning a profit.

But the system we inhabit now is not based on earning a profit; that's merely the public-relations propaganda used to cloak its real heart: Infinite Greed.Maximizing private gain by any means isn't about earning a profit; it's about strip-mining the planet and the labor and profit of others.

If I buy a political favor that essentially eliminates competition in my private fiefdom, that doesn't generate more goods and services; it's simply maximizing my private gain at the expense of everyone else in the system.

Goosing the stock market ever higher only solves one problem: the terrible prospect that the assets of the incredibly wealthy might reset lower. It doesn't make the system sustainable or less evil; indeed, it is the manifestation of the evil at the heart of the entire system. It's not about shiny capitalism for the masses, or earning a profit by producing more and better goods and services: it's about doing whatever it takes to maximize private gain.

The success of this vast defense of those maximizing their private gain at the expense of everyone else appears invulnerable to many. In a system where central banks can print infinite money to further expand the value of the Financial Aristocracy's assets, it certainly seems that there is no force in the Universe that could possibly reduce this mighty Empire that worships only one god, that of maximizing private gain by any means.

Let's say this system is sustainable: the system that enriches the few at the expense of the many, the system that strip-mines the planet to enable private jets and trillions of dollars of wealth to rest comfortably in tax havens, a system that pays Nobel-prize-winning shills to spew nonsensical defense of the patently indefensible: if this is sustainable, we must ask: at what cost?

Is feeding this machine cost-free? Are there no consequences? Can the Federal Reserve not just create money to further enrich the few, but eliminate all cost and consequence as well?

To everyone resigned to the permanence and invulnerability of this evil, and everyone angered by the idea that it might implode and deprive them of their share of the swag, I suggest we consider a funny thing called Karma, which is the simple idea that actions have consequences which cannot be shoved onto others forever.

A similar idea is reversal is the way of the Tao. What appears mighty and invulnerable melts into air, as extremes naturally cycle to the opposite state.

Our loss of the ability to distinguish between earning a profit and maximizing private gain by any means has triggered a cultural crisis, one that few are willing to recognize, much less discuss. All those angered by the mere question of the viability of this predatory pillaging in the name of capitalism are incapable of even admitting this cultural crisis exists. Their response to the question is to accuse anyone who dares question the morality and sustainability of the current system of desiring a financial Apocalypse.

The easily angered are again confusing two distinct concepts: wanting an Apocalypse is entirely different from seeing an Apocalypse on the horizon. A financial Apocalypse wouldn't even touch the assets of the many, because their financial wealth is near-zero. If the $20 trillion (or whatever the number is, nobody really knows) sitting in tax havens melted into air, who would even notice except the pillagers and those paid to defend them?

The cultural crisis angers people because it threatens to loosen their grasp on the few threads of security they believe are real. Those thin threads are illusory, and a crisis will eventually be resolved in one fashion or another--not necessarily in an Apocalypse, but in a fast-spreading recognition of the wrongness and unfairly distributed costs of supporting a system that is intrinsically evil and unsustainable.

Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)Are you like me?Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible. And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.
You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.
Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.
So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.
It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.
I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.
Test drive the first section and see for yourself. Kindle, $9.95print, $20
"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."Laura Y.Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube)

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Dave O. (postage stamps), for your much-appreciated generous contribution to this site-- I am greatly honored by your support and readership.

Thursday, April 23, 2015

Claiming to own X quantity of gold is one thing, and reporting how many times the gold has been pledged as collateral is another.

When correspondent Scott A. Batten offered to write an explanation of the rehypothecation of gold and why it matters, I quickly accepted. Like many others, I have breezed over the word rehypothecation with the basic understanding that it means assets pledged by counterparties (such as the infamous copper stored in Chinese warehouses) are reused as collateral/repledged--in effect, the same assets are pledged as collateral multiple times.

But beyond this, I have not had a clear understanding of how the rehypothecation of gold reserves threatens the whole shaky edifice of Infinite Greed, oops, I mean neoliberal capital markets.

Here is Scott's commentary:

When introducing a new concept, it is best to start with the definition of the words to be used. In this case, the discussion of rehypothecation and how it places the world at risk with the fun and games played in the stock market.

Rehypothecation:

Rehypothecation occurs when your broker, to whom you have hypothecated -- or pledged -- securities as collateral for a margin loan, pledges those same securities to a bank or other lender to secure a loan to cover the firm's exposure to potential margin account losses.

When you open a margin account, you typically sign a general account agreement with your broker, in which you authorize your broker to rehypothecate.

Now, let’s put this into easy to understand language. Let’s say that you have ten dollars. You take it to the bank to let them “borrow” it, while paying you interest. What you have done, in reality, is given them your money to use as they see fit, while giving you a small percentage of the gains that they will earn. A bank would loan the money to a home buyer or perhaps a small business. At the very least, they can lend all the money in excess of their requirement to hold some cash as reserves--say 10% for ease of math.

They now have nine dollars to invest. Their last resort is to offer it to another bank for that bank to “hold”, because that bank doesn’t have enough money to meet its required reserves. Seems simple enough, right?

Welcome to the games bankers play to make money. Now that this simple format is in place, let’s move to where the serious dangers lie.

Precious Metals:

During World War II, many foreign countries feared that their gold reserves, which at the time backed their paper money, might be taken by an enemy and in 1939, the good old USA was a very neutral country, like Switzerland, only there was a much better deterrent than the Alps-- the Atlantic Ocean. So, many countries--England, France, and others--sent us their gold bars to be stored alongside ours in Fort Knox. Later, after the war was over, we convinced them that it was fine to leave it there and in fact, with the Cold War starting other countries joined in, including Germany.

Now, what good is a pile of gold sitting in a fort going to do? It costs a lot to protect it, and the US was paying a small sum in interest, while getting a smaller sum back in “protection fees”. So, the Federal Reserve had a wonderful idea, at least in their minds.

Since we have this gold, let’s issue paper on that gold as though it was ours, after all it is sitting in Fort Knox, and earn a bit of money on the side. So long as the Cold War lasted, the gold certainly wasn’t going anywhere. Here is where the trouble began. It was pretty small potatoes for a good while, until we went off the gold standard in 1971 during the Nixon Administration. What good is having a precious metal to back fiat currency, when a promise is just as good? Enter the danger zone.

Now, the gold in Fort Knox isn’t doing anything. So, what to do? Well, each bar of gold has a unique mark on it to say who owns it. The Cold War is still raging, so no one is going to ask for it back anytime soon. Let’s melt down some of that gold, just a small percentage of it, and sell it off as bullion. Gold is high and the foreign countries won’t ask for it all, so let’s skim a bit here and there. No one will know, and we can make money.

Then debts started to accrue, so they got brazen and started melting bars and reselling bars as their own gold, because they don’t want to use their own gold, when German gold is just the same, except for that little mark. Erase the mark and put your own on it and sell it as yours, using your gold as the “backer” in case Germany asks for some of it back.

Well, it wasn’t long until greed set in. Those gold bars that were sold to say, China or Japan, were resold to Austria or Iraq. Much like the bundling and reselling of home loans in the 1990’s, soon the German melted gold was in seven different countries with seven different marks, but no German mark upon them remained. This still wasn’t the breaking point though, after all there is still plenty of Gold in Fort Knox to cover what is owed to them.

I don’t know who’s idea it was, but it was a bad idea. They decided that they could sell paper promises of gold being held in the vaults. The last number I saw was 140%. Which means that if they have 100 pounds of gold, they can sell paper as though they have 140 pounds of gold. Now, they can also sell that gold outright as well. So, it's possible that they could sell 140 pounds of paper gold and sell a portion of the physical gold. too.

Confused yet? Here is where we stand today. No one knows how much gold is really in Fort Knox. We only know what they say is in Fort Knox. The same is likely true for the Federal Reserve and possibly the major banks; after all, if the Fed starts demanding to know what’s in those banks, they might have to show theirs too. So, let’s say that the economy starts to really go south around the world. As you know from the news, Germany asked to see their gold at Fort Knox and were denied, so they asked for their gold back. Smart move on Germany’s part in my mind. Answer from the Fed, we will get it to you sometime in the near future. This wasn’t challenged by Germany.

Why? Rehypothecation. Germany knows that they have been doing the same thing with gold that we have. It’s been sold to multiple people at the same time, under the theory that not everyone will want it at the same time, so we can just move it around as needed.

This game of musical golden chairs works fine, until the musical economy stops. When countries start to rack up debt and desire to sell their own gold to pay the bill, and they can’t get it, they get nervous. Now, if the economy is going south and the price of gold is heading up because of fear, those people holding paper gold in the form of futures or just deposit promises begin to sell off for profit or out of financial need. So long as it’s a trickle, no problem, but if it becomes a torrent....

Remember the 140% rule? Well, what if the Federal Reserve only kept 60% of the 100% that the paper gold was written on? Now there is an 80% shortage. Someone is about to have their musical golden chair pulled out from under them. They will get paid, BUT that payment will come as fiat currency. As the golden parachute deflates, how good is fiat currency? This is why there are so many on the fringe demanding to see the gold reserves and others are saying gold will hit $5,000 an ounce or higher. It is theoretically possible that for each gold promise, that it is backed by 1/5 or less of physical gold. No one knows, because no one can audit the physical gold.

China is getting ready to release their gold reserves. That is, they will do like the Fed and say how much they have. We cannot call them on their real reserves, because then they can do the same to us. Now, if all the gold is still in Fort Knox and the Federal Reserve, then the US can call for a real accounting and show ours as well.

However, if we don’t and China does, and calls for the US to do the same, then a lot of fear enters the market. There is a reason that people say "never own paper metals." This is that reason. You might get the value of that gold, but it will be in fiat currency and if things are crumbling then fiat promises become flat losses.

Thank you, Scott, for the explanation. It's a funny thing about financial games; whatever the Mainstream Financial Media mocks as conspiracy theories often later turn out to be accurate.

I do not claim any expertise in the gold/paper gold markets, but it's clear that claiming to own X quantity of gold is one thing, and reporting how many times the gold has been pledged as collateral is another. In a transparent financial system, the citizens of the U.S. would be invited to tour Fort Knox (in small, secure groups, of course) and count the nation's gold directly. What's the harm in showing off the gold to anyone willing to go through security?

Why keep the nation's gold reserves so mysteriously secret? What's the point in being so cagey about it? Maybe rehypothecation isn't the reason for the secrecy; then what is? Fear of precisely what? Isn't gold supposed to be a foolish relic? What's the danger in letting people look at the foolish relic and count the bars and note the serial numbers on the bars? What's the risk in that?

I propose turning Fort Knox into a profitable tourist attraction. If gold is just a foolish relic, then charge $50 a person to wander around "our" gold. It's not like anyone can slip a heavy bar into their purse or pocket without being detected. Put it behind bulletproof glass if you want. What's the risk?

Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)Are you like me?Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.

And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."Laura Y.Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube)

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